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New stress test could put monolines at a disadvantage

The Finance Minister announced three new housing measures meant to ensure stability in the housing market, but one of those – the amended stress test requirements – could impact monolines more so than big banks, according to one veteran broker.

“If you want a five-year fixed you now qualify at 4.64%. That will take effect October 17. The really interesting question has to be: It talks about all insured mortgages,” Ron Butler, a broker with Butler Mortgage, told MortgageBrokerNews.ca. “We think of insured mortgages as high ratio mortgages but every single mortgage that a monoline sells is insured, so does it apply to them as well? To all conventional five year (monoline) mortgages? The question is not answered.”

MortgageBrokerNews.ca contact the Ministry of Finance for clarification on the amendment.

“The mortgage rate stress test eligibility requirement will apply to all insured mortgages, including high-ratio mortgages , as well as portfolio insurance and other low-ratio insured mortgages,” Paul Cuchesne, deputy spokesperson and manager of media relations at the Ministry of Finance, told MortgageBrokerNews.ca in an email.

And that, according to Butler, could put monolines at a disadvantage.

“If the banks are not forced to use the same policies this is a big problem for the monolines,” he said. “(It) puts them at a competitive disadvantage.”

As CMHC explains it, “portfolio insurance helps lenders manage their capital more efficiently and small lenders to compete on an equal footing with large lenders. It allows more lenders to compete in the mortgage loan insurance market by lowering entry barriers, thus expanding consumer choice.”

Raising the barrier to attain an insured mortgage – by requiring homebuyers to qualify at higher rates – will make it more difficult for homebuyers to qualify for many loans, including all prime monoline mortgages..

"Some lender must have insurance on every loan they offer, all the monolines and many small banks and trusts simply do not have any ability to sell an “A” mortgage unless they have bulk insurance (Home Trust and EQ Bank and the rest can sell “B” mortgages without insuring them) from CMHC, Genworth or Canada Guaranty," Butler said. "A barrier to attain bulk insurance will just turn every smaller lender into a lender that obeys the new rule. They may lose business to the banks initially but they will stick to the rules."

Early Monday, Finance Minister Bill Morneau announced a number of changes aimed at safeguarding the housing industry.

One of those was a tweak to the qualifying requirements for insured mortgages.

“To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate,” the Ministry of Finance wrote in its backgrounder on the changes. “Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years.

“Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years and more,” it continued. “Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.”

Rates aren't going anywhere, it's bogus bogeyman!! As one Agent noted on CBC, this will create a whole generation of renters in the GTA and beyond. I also think the risk to CMHC is over-stated. We need to start pushing for a reversal of this item straight away! And Butler is right that this will wreak havoc on mono lines, and equally important, the competitiveness in the market. Not good, not happy!

Hi LanceH, I was on CBC last night and yes, this will push first time homebuyers into renting for longer. With vacancy rates all all time lows in Toronto and Vancouver, and with Air BNB gobbling long term rentals we are seeing already multiple offer situations for rental units - this will make the situation worse and push those that want to stay in the city outside to an area where there are units available and that the rent is affordable. Not a good situation. Not to mention what it will do to the monolines, this industry and a reduced choice for Canadians.